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Motley Fool: 3 High-Yield Dividend Investing Tips

Motley Fool: 3 High-Yield Dividend Investing Tips

(Dollar Photo Club)

By    |   Wednesday, 24 August 2016 10:00 AM


High-yield dividend investing can be extremely lucrative if you choose the right stocks. Sounds easy enough, but as the cliché is true: the devil is in the details.

“Yet those who just buy the highest-yielding stocks they can find often discover that they've made a big mistake,”” Motley Fool’s Dan Caplinger warned.

“If you want to use a high-yield dividend investing strategy but don't want to leave yourself vulnerable to the traps that many dividend investors fall into, then you need to understand the dangers of high-yielding stocks and know how to spot warning signs that should make you steer clear of a particular stock.”

He recently offered three questions to ask yourself to maximize your income by selecting the right stocks with high dividend yields.

Has that once hefty dividend payment suddenly (and silently) vanished?

Companies whose shares pay high yields "are often vulnerable to changing financial conditions that can require them to cut or even entirely suspend their dividend payments, and that can turn what was previously a high-yield dividend payer into a low-yield or no-yield stock," he warned. “Often, the high yield reflects a beaten-down share price that reflects how investors have anticipated a cut by bidding the stock downward." But it may take time for that news to trickle down to the average investor, he said. He urged investors to check a company's investor relations website, “and also do an internet search on the company's name and "dividend cut" to double-check on whether the dividend is still safe.”

Will that high-yield dividend stock also have a lofty share price?

A stock that pays a large dividend isn't automatically a good investment. Even if you're interested in current income, you always have to pay attention to the total return that a stock generates, he said. “If the share price goes down, then the money you receive in the form of dividends doesn't truly represent a positive return but rather looks more like a return of your own invested capital,” he said. If an entity has weak fundamental business strength, then a dividend payment might not outweigh the downward pressure on its stock.

Don’t be blinded by the flash in the pan: Is there any long-term growth potential?

"It makes sense to look at stocks with slightly lower yields but that have more potential to increase their payouts in the future. For instance, a stock that yields 3% but grows its dividend by 15% each year will catch up to a stock that currently yields 6% but has no future dividend growth potential in just five years," he said. "By looking beyond today at the dividend future of a stock, you can often find bargains that other investors miss."

Meanwhile, stock-market guru and economist Jeremy Siegel predicts a sea-change in investing in which investors will once again embrace dividend-paying stocks. "I think we're in the first inning of shifting to dividend-paying stocks," the finance professor at the University of Pennsylvania's Wharton School recently told CNBC.

"Investors are becoming convinced they're not going to be able to rely on CDs, their bank accounts, or even bonds as a source of income," and may finally include that "maybe they'd better turn to stocks," he said.

"Equities are the major income-producing asset of the future," he said.

"Maybe we'll go back to the period of the '50s and early '60s, when people really did buy stocks for their income-earning aspects, and that was a source of very good demand and very good stock returns," he said.

As for companies stocked with cash, Siegel says they may be painted into a corner.

"Firms don't see a persuasive reason to invest," which is "why you've got dividends and buyback — that's what they're doing with their money."

"But as least they're returning it to the shareholders," said. "Things could be worse."

However, while dividend yields appear to bolster the case for buying stocks now, but other metrics tell a different story, The Wall Street Journal has warned.

“Investors who expect bond yields to stay low and dividends to stay (relatively) high are buying stocks not because they are a bargain, but because they look better than bonds. The dividend bolsters the case that there is no alternative to shares,” WSJ.com’s James Mackintosh explains.

Low bond yields are sending mixed messages to investors.”First, that the outlook for the world economy is grim, meaning they should expect lower returns on all assets in the future. Second, that government bonds are unappealing, so they should invest in riskier assets instead,” he explains.

“If these provide an accurate outlook for growth and inflation, we won’t be having much of either for the next couple of generations. Dividends look more and more attractive,” he said.

(Newsmax wire services contributed to this report).

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High-yield dividend investing can be extremely lucrative if you choose the right stocks. Sounds easy enough, but as the cliché is true: the devil is in the details.
high yield, dividend, investing, tips
Wednesday, 24 August 2016 10:00 AM
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